Goods imported into and exported from India are subject to levy of customs duty under the Customs Act, 1962.[1] In addition to that, Integrated Goods and Services Tax (‘IGST’) is leviable as an additional duty of customs on such goods.[2]
Exemption to goods imported into India on lease basis
It is a common practice to import costly machinery, equipment or goods on lease basis for completion of a project. It is in such cases that the question of double taxation arises. When importing goods on lease basis, the goods would be subject to IGST on value of imported goods (as part of customs duty) as well as GST on the import of the leasing services.
To avoid such double taxation, Notification No. 50/2017-Cus. dated 30 June 2017 completely exempted inter-alia goods imported on lease, from payment of IGST on import.[3]
One of the conditions to avail the exemption was that the importer shall execute a bond to pay GST on the services so received, on reverse charge basis.
Thus, the prescribed format of the bond specifically mentioned that the GST must be paid on ‘reverse charge’ basis. This became an issue when importing goods on lease from Special Economic Zone (‘SEZ’) Units. This is because though for purposes of Customs law, SEZ is considered akin to a foreign territory, for purposes of GST law, SEZ falls under the taxable territory of India.[4] Accordingly, on supply effected from SEZ to Domestic Tariff Area (‘DTA’) GST is payable on forward charge basis and not on reverse charge basis.
Therefore, the condition of executing a bond undertaking to pay GST on ‘reverse charge’ basis could not be fulfilled by the lessee as the liability to pay GST in this case is on the supplier situated in SEZ (on forward charge basis) and not on the lessee in DTA. This acted as a deterrent for lessees to avail benefit of Sl. No. 557B when clearing goods from SEZ to DTA.
Taking into account the aforesaid issue, Notification No. 50/2017-Cus. was amended w.e.f from 1 October 2021[5], and proviso was inserted to the above-mentioned condition for clarifying this aspect. As per the proviso, when goods are supplied ‘from an SEZ Unit to DTA’, then the lessee in DTA is dispensed with the requirement of executing a bond undertaking to pay GST on reverse charge basis. Thus, on account of the amendment, lessee procuring goods from SEZ Unit too could avail the exemption in question.
But what about supply from FTWZ to DTA?
However, the confusion persisted as to whether the proviso dispensing with the requirement to execute a bond will be equally applicable to supply of goods from Free Trade Warehousing Zone (FTWZ) to DTA. This is because though under the law FTWZ too is treated as an SEZ[6], the functioning of the two is slightly different. FTWZ is specifically for storing/warehousing the goods while SEZ is for manufacturing. Due to this inherent nature of FTWZ, every person operating in FTWZ is not necessarily an FTWZ Unit. Most often, FTWZ Unit holders rent out space in their unit to others who wish to utilise the space for warehousing and trading. Thus, in most cases, the FTWZ Unit itself is unlikely to be involved in any trading activities itself, but it is the lessee of that space which engages into activities involving clearing goods to DTA. Thus, while supplies to DTA would be effected from the FTWZ, the supplier is most often not the FTWZ Unit, but merely someone renting space in an FTWZ Unit.
Thus, when the proviso dispensed with the need for a bond when goods are supplied ‘from an SEZ Unit to DTA’, the doubt arose as to whether the proviso is applicable when the goods are supplied not by an FTWZ Unit, but by a supplier located in FTWZ Unit.
The basic premise of the exemption is to avoid double taxation. Thus, logic dictates that as long as GST is paid on the supply in question (irrespective of whether paid by the lessor or lessee), the benefit of the exemption is available. However, if strict interpretation of the exemption is adopted,[7] then authorities were open to contend that the exemption would only be available when the supply is by an FTWZ Unit itself and not just from an FTWZ.
Faced with the above conundrum, Seros Energy Private Limited approached the Customs Authority for Advance Ruling, Mumbai for clarity on the issue.
Vide Ruling dated 21 November 2025[8], the CAAR has held that the benefit of exemption will be available and the proviso will be applicable as along as the movement of the goods is from FTWZ to DTA, irrespective of whether the supplier itself is an FTWZ Unit or not.
The CAAR Authority has based its Ruling on the basic principle that the principle behind the exemption was to avoid double taxation. Thus, as long as GST is being paid on the lease charges, the benefit of the exemption will be available. In light of the same, it is clear that the importer would not be required to execute a bond undertaking to pay GST on reverse charge basis.
This pragmatic Ruling is a welcome move. If the exemption is not extended to such supplies, the lessor in FTWZ would have to pay GST on lease charges, while the lessee in DTA would have to pay IGST on the value of the machinery. Machinery taken on lease are often of high value. Thus, the implication of the double duty payment would be very high and would result in blockage of capital. The lessee would be saddled with a huge amount of IGST credit which they would find difficult to utilise. Most importantly, a strict interpretation would have resulted in imports of machinery from other countries being preferred over procurement of goods from FTWZ in India. The Ruling now issued has considered the broad overview of the legislation and adopted a purposive interpretation, thereby ensuring that lease transactions between FTWZ and DTA can operate in a smooth and tax efficient manner.
The authors would like to conclude the Article by saying that Advance Rulings are only binding on the Applicant therein. Thus, while lessees other than Seros Energy too can try take recourse to this Ruling, however, it is not necessary that Customs Authorities apply this Ruling to them. To conduct the transaction in a risk-free manner, it would be advisable for lessees to obtain a Ruling in their own name, before effecting any similar transaction, especially one involving a high value equipment. The assessee was represented by Lakshmikumaran & Sridharan Attorneys here.
[The authors are Senior Associate and Partner, respectively, in Customs practice at Lakshmikumaran & Sridharan Attorneys, Mumbai]
[1] Section 12 of the Customs Act, 1960
[2] Section 3 (7) of the Customs Tariff Act, 1975
[3] Exemption was for goods which are imported ‘under a transaction covered by item 1(b) or 5(f) of Schedule II of the Central Goods and Services Tax Act, 2017. Section 1(b) of Schedule II to CGST Act, 2017 reads as ‘any transfer of right in goods or of undivided share in goods without the transfer of title thereof, is a supply of services’
5(f) of Schedule II to CGST Act, 2017 reads as ‘transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration.’
[4] Section 2(22) read with Section 1 of the IGST Act ,2017.
[5] Vide Notification No. 46/2021-Cus. dated 30.09.2021
[6] As per Section 2(n) of the SEZ Act, 2005 ‘Free Trade and Warehousing Zone’ means a Special Economic Zone wherein mainly trading and warehousing and other activities related thereto are carried on.
[7] The Hon’ble Supreme Court in CC, Mumbai v. Dilip Kumar & Company [2018 (361) ELT 577 (SC)], held that exemption notifications must be interpreted strictly, and in case of any ambiguity, interpretation in favour of Department must be adopted.
[8] Reported at 2025-VIL-05-AAR-CU.
